No question, tax preparation software is making our lives easier. Not only does it help us figure out what numbers go in which box, it does much of the headache-inducing math that infects the dreaded Form 1040. But software can't help with what can be the most time-consuming and error-laden part of the process: gathering all those little scraps of paper that arrive in the mail every January and February.
Come spring, many of us are buried in drifts of W-2 wage forms, 1099 interest and dividend notices, 1098 mortgage payment reports, and all the rest. However, help is on the way. This year, one tax preparation outfit--Intuit--is testing a system that will allow TurboTax users to download tax-reporting information from financial institutions directly to their software. If it works, don't be surprised if, in a couple of years, all that paper goes the way of the Princess phone.
Here's the idea: You would electronically import 1099 and other tax information directly from your broker to your tax software, where it would magically appear in just the right boxes on your computer screen. "We've made significant progress in making tax prep easier," says Robert Meighan, general manager of Intuit's personal-tax group. "But the thing that's really going to save time is when we make this an automated process."
Plenty of bugs need to be worked out. And it will take a change in federal law for the process to be really attractive to the financial firms that generate the forms. For them to save money, for example, the law that now requires them to mail the paperwork to taxpayers must be revised. But brokers already routinely download monthly or even daily account statements directly to financial-management software, such as Intuit's Quicken or Microsoft's Money. Compared with that, downloading annual tax reporting data should be simple. "The technology could be available quite quickly," says Jeff Thiel, product manager for Microsoft's TaxSaver. But, he adds, industry and the Internal Revenue Service must still agree on formats for the downloads. "The much harder part will be getting agreement on how the processes will work," he says.
TEST RUN. This tax season, TurboTax will give the downloading scheme its first test, most likely centered around customers of Salomon Smith Barney and Fidelity Investments. While it has not yet formally agreed to participate, Salomon's online clients are likely to be able to download both 1099s and profit-and-loss statements--including adjusted purchase prices of securities--directly to the Web version of TurboTax. At the same time, about 200,000 of Fidelity's wealthier customers will be allowed to download similar data to desktop TurboTax software. All they will need to do, says Dan Kraut, Fidelity's vice-president for online brokerage, is go to the Fidelity. com Web site and request the service. Their 1099 and Schedule D capital-gains data will be downloaded to their home computers. From there, they will just need to open their TurboTax software and transfer the data file. Fidelity figures that 20,000 to 50,000 customers will actually try out the system this year. Says Kraut: "Our goal is to give the customers the data they want in the form they want it."
Just about everything an investor needs will be available in these tests. Included will be interest, dividend, and capital-gains information for nearly all brokerage transactions. To think about how big a change this would be, consider what happens today. In January, a broker's computer spits out 1099s for all its customers. While it sends the IRS a computer tape with all that information, it must print it out and mail paper copies to individual customers. They, in turn, throw them in a drawer until they crank up tax prep software and punch the numbers into a box on a computer screen.
Unfortunately, taxpayers too often transpose numbers or put them in the wrong places. For people who don't file electronically, the process gets even stranger. They must print out their returns and mail them to the IRS, where someone inputs them back into a computer. All that shuffling of data back and forth means mistakes. It wastes the time of taxpayers, and it costs banks and brokers a small fortune in printing and mailing costs. But if all the information were downloaded directly into tax programs, the vast majority of taxpayers could file a truly paperless return. After all, most individuals receive their income solely from wages, interest, and dividends--all data that could be easily downloaded.
"BIGGEST CHALLENGE." Deductions are more complex, but mortgage interest payments could be handled smoothly. So could state and local income and real estate taxes, if local governments got on board. Downloading other itemized deductions--medical expenses and charitable contributions, for instance--may be more difficult. However, since barely a quarter of all taxpayers itemize, most of them ought to be able to file in less than an hour. It would be the high-tech equivalent of the tax-return-on-a-postcard that reformers have dreamed about for years.
Despite the advantages of largely electronic tax preparation, Intuit's Meighan says Turbo has had trouble persuading financial institutions to participate in the test. "Our biggest challenge has been getting [them] on board. They need to have a compelling reason to make this available." One reason for the resistance: Federal law requires that 1099s be sent to taxpayers by first-class mail. As a result, even if brokers make the data available for downloading, they must still bear the cost of printing and mailing paper forms to the same customers.
IRS officials say they are aware of the problem, and are trying to determine whether they can fix it through regulation, or whether it will require legislation. But Robert Barr, assistant commissioner for electronic tax administration, says the agency will do what it can to solve the problem. Last year, 20 million to 30 million taxpayers did their returns on a desktop, and an additional million used the Web. With companies such as Intuit and H&R Block offering full-blown tax-prep products on the Internet, and investment-advisory firms such as H.D. Vest offering free Web filing, online tax preparation may be coming of age (table). But 40 million returns are still being being done with a pencil, notes Intuit co-founder Scott Cook.
It's the same story with e-filing, where the IRS is placing its own huge bet. Still, only 33 million households--just a quarter of all taxpayers--will file electronically, says Barr. And most will do so through a professional tax preparer, rather than on a home computer. One reason people have been slow to accept e-prep and filing is because they feel the software remains too complicated and time-consuming. But if efforts to assemble all those scraps of paper for you on a Web page or your desktop succeed, the chore we all hate will become a lot more palatable.